Business tax

Definition and legal basis:

Trade tax is a real tax levied by municipalities on the objective earning power of a commercial enterprise. It is one of the most important sources of income for municipalities and is regulated in the Trade Tax Act (GewStG). Trade tax was introduced in its current form in 1936 and has undergone several reforms since then. As part of the German tax system, it contributes to the financing of municipal tasks and at the same time influences the attractiveness of a location for companies. In addition to the Trade Tax Act (GewStG), the Trade Tax Implementation Ordinance (GewStDV) also forms the legal basis. In addition, the German Basic Law (in particular Article 106 (6) of the Basic Law on revenue sovereignty) and the respective state constitutions play an important role in the structuring and levying of trade tax.

Taxable person and tax base:

In principle, all commercial enterprises operating in Germany are subject to trade tax. This includes sole proprietorships and partnerships as well as corporations. Freelancers and agricultural and forestry businesses are exempt from trade tax. The assessment basis for trade tax is the trade income, which is calculated from the profit determined in accordance with the Income Tax Act or Corporation Tax Act, taking into account certain additions and deductions. The most important additions include:
1. 25% of the consideration for debts (e.g. interest)
2. 25% of pensions and permanent charges
3. 25% of the silent partner’s share of profits
4. 20% of rent and leasehold interest for movable assets
5. 50% of rent and leasehold interest for immovable assets Reductions include:
1. 1.2% of the unit value of the real estate belonging to the business assets
2. Profits from shares in other commercial enterprises
3. Foreign income, insofar as this is not subject to domestic taxation

Calculation and collection rates:

Trade tax is calculated in several steps: 1. Determination of trade income
2. Rounding down to the nearest 100 euros and deduction of the tax-free amount (24,500 euros for natural persons and partnerships)
3. Application of the tax assessment rate (3.5% since 2008)
4. Multiplication of the tax assessment amount by the municipal assessment rate The assessment rate is set individually by each municipality and varies greatly between municipalities. The national average is around 400%, with large cities often having significantly higher assessment rates. The trade tax rates range from 200% in some small municipalities to over 500% in large cities such as Munich or Frankfurt am Main. There is a reduction in income tax for partnerships and sole proprietorships in order to avoid a double burden. According to § 35 EStG, trade tax can be credited against income tax at a flat rate.

Importance for companies and municipalities:

Trade tax has a dual significance: on the one hand, it is an important source of income for local authorities and, on the other, it represents a significant cost factor for companies. For local authorities, trade tax often accounts for the largest share of tax revenue and enables the financing of local infrastructure and services. The level of the assessment rate is therefore an important instrument in municipal location competition. For companies, trade tax is a key factor in their choice of location and tax planning. The total tax burden of a company in Germany is made up of corporation tax, solidarity surcharge and trade tax and can vary considerably depending on the location. This sometimes leads to relocations or the use of tax structuring options such as a trade tax group.

Current developments and discussions:

Trade tax is regularly the subject of political and economic debate: 1. reform or abolition: There are repeated proposals to fundamentally reform or even abolish trade tax, for example in favor of a higher municipal share of VAT. 2. expansion of the group of taxpayers: The inclusion of freelancers in the trade tax liability is being discussed. 3. adaptation to the digital economy: the increasing importance of digital business models calls into question the traditional linking of trade tax to physical business premises. 4. volatility of revenue: Municipalities are susceptible to revenue volatility due to their heavy reliance on the cyclical business tax. 5. inter-municipal competition: The ability of municipalities to set their own assessment rates leads to tax competition, which is the subject of critical debate. In summary, it can be said that trade tax is a complex and multi-layered element of the German tax system. It plays a central role in the financing of local authorities and is also an important factor in the location decisions and tax planning of companies. The future structure of trade tax will continue to be the subject of economic policy debates, particularly with regard to the challenges of globalization and digitalization.